Exchange Square in Hong Kong / Credit: Urban Napflin/Shutterstock.com.

Shearman & Sterling has for years been a major player in the Hong Kong IPO market. But this year, the Wall Street firm saw a problem: the number of initial public offerings (IPOs) in Hong Kong had dropped dramatically.

The U.S.-China trade war, global economic worries and political unrest in Hong Kong all contributed to the downturn, which has been significant. This past summer has been the worst for IPOs in Hong Kong since 2012, according to the South China Morning Post. In the entire month of August, only one company listed on the Hong Kong stock exchange, down from eight in the same month the previous year. As of September, 101 companies have listed in Hong Kong this year, down from 150 in the same period last year. Making the decline even more pronounced, total funds raised by IPOs as of September is $10.8 billion, less than half the amount raised in the same period last year.

Kyungwon Lee/courtesy photo

But Shearman's Hong Kong-based Asia capital markets team leader, Kyungwon Lee, is not worried. The firm has adjusted, he said. And the practice is now less reliant on Hong Kong IPOs.

In the past 12 months, at least 11 Hong Kong capital markets lawyers have left Shearman, including Lee's predecessor, Colin Law, who joined leading Chinese firm Fangda Partners along with partner Peter Chen. Two former associates joined another top Chinese firm, Jingtian & Gongcheng, as partners; two more are now associates at Latham & Watkins and Wilson Sonsini Goodrich & Rosati.

Before the departures, Lee admits that Shearman's capital markets practice focused on IPOs, with 80%–90% of the practice comprised of listings work. Now, IPO work will make up only 50% of the practice, and the other half will focus on mergers and acquisitions for the higher margins, he said.

"We wanted our new Hong Kong practice to be evenly split with IPO and M&A," Lee said. "We know that would insulate us from the volatility of the IPO market, [and enables us to] get better realisation and access to corporate clients for the non-transaction side of the work, like compliance."

Indeed, the profitability of Hong Kong IPO work has been squeezed by capped fees and intense competition, especially with top Chinese firms starting and strengthening their own Hong Kong law practices in recent years. U.S. firm Paul Hastings is also shifting away from IPOs to M&A work, for which the firm can charge premium rates without fee caps.

Earlier this year, Lee found just the guy to implement his strategy to increase M&A work. Max Hua, a former Cleary Gottlieb Steen & Hamilton associate, joined last month from leading Chinese firm Haiwen & Partners, where he was a partner for two years.

Max Hua/courtesy photo

A large part of Hua's practice is advising private equity firms and their portfolio companies, which gives him access to corporate clients for future public M&A work after those portfolio companies go public. Hua's experience is also more on the issuer's side, compared with the previous team, which mostly focused on advising underwriters. Working with issuers directly helps with getting compliance matters and M&A opportunities, noted Hua.

Both Lee and Hua said they foresaw this year's IPO market slowdown. Last year, the Hong Kong Stock Exchange had a record-breaking year with 208 new listings, up nearly 30% from the previous year. But everyone knew that boom wasn't going to last.

"We already saw the signs towards the end of 2018," Lee said. "It's market fatigue. Investors weren't as excited about buying into IPO opportunities."

And despite raising $36.5 billion in IPO proceeds, the most in the world last year and, according to financial data provider Refinitiv, the highest in Hong Kong since 2010, the post-IPO performance of last year's new stocks has been poor, which contributed to the slowdown, said Hua.

For example, Chinese smartphone maker Xiaomi Corp.'s $5 billion listing, one of the most anticipated IPOs of 2018, has been trading at less than half its debut price since May. Meituan Dianping shares, which raised $4 billion in a September listing, only started trading above its IPO price 11 months later. And Ping An Healthcare and Technology Co. Ltd. shares, which raised $1 billion, have been volatile and even halved months after its debut.

And the three months of increasingly violent anti-government protests that have shaken the city have not helped, Lee added. Chinese e-commerce giant Alibaba Group Holding Ltd. recently postponed a $15 billion Hong Kong listing due to the financial and political instability caused by the Hong Kong protests, according to media reports. The Alibaba listing would have been the largest listing in the world this year.

Hong Kong's chief executive, Carrie Lam, announced last week that the bill to allow extraditions to mainland China, which ignited the protests, will be withdrawn – one of five demands by the protesters – but protests have continued.

Still, IPO work remains important for law firms in the Asian financial hub. Reynolds Porter Chamberlain, a U.K. firm best known for its insurance disputes practice, is expanding its Hong Kong IPO practice due to local market needs.

Shearman's Hua said he is currently advising a Chinese healthcare company on a Hong Kong IPO, which he was working on back when he was at Haiwen and now will finish at Shearman.

"I'm not worried about the market even at this particular juncture, because of how our practice is structured," he said. "If the IPO market is down, we can do more M&A."

And he is confident that listings will pick up again.

"The IPO market always comes back," Hua said.

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